Ethics & Public Policy Center

Unsubstantiated Budget Attacks, the Sequel

In April 2011, President Obama went to George Washington University and delivered a highly publicized and very political attack on the budget plan put together by House Budget Committee Chairman Paul Ryan. In that speech, the president called the Ryan plan, and especially its Medicare-reform component, an unconscionable attack on the elderly. He also accused it of being, effectively, un-American.

Fast-forward to April 2012. Congressman Ryan has again assembled a budget plan to head off national insolvency. He has again rallied his colleagues to take up this budget blueprint and pass it through the full House, despite the political risks associated with doing so. And, like night following day, the president has again delivered an incredibly partisan attack on the House’s handiwork, denouncing it with some of the most over-the-top political rhetoric ever heard in a presidential address.

In that regard, yesterday’s “address” was very similar to last year’s highly political budget speech. It was sort of like a movie sequel, trying to capture that same partisan magic that fired up his electoral base a year ago. Unfortunately for the president, his speech today was about as imaginative and interesting as most big-budget movie sequels.

He called the budget plan adopted by the House last week a “radical vision” that would undo the nation’s social contract by penalizing the poor and favoring the rich. And he again supported an alternative vision for fiscal policy, based on what he calls a “balanced plan” for deficit reduction—meaning a plan that raises taxes to cover higher governmental spending commitments.

At the bottom of this budget standoff is a fundamental difference of views on what is causing our fiscal crisis in the first place, both today and in the future.

The president and his allies continue to cling to the false narrative that the reason we are experiencing budget deficits is because of tax cuts and unfinanced wars. This is a completely distorted view of budgetary reality.

As shown in the following chart, the real source of today’s deficits and debt, and the source of our national insolvency if it is not addressed soon, is runaway entitlement spending. Taxes have gone up and down over the past four decades, but have always hovered around 18 percent of GDP. Meanwhile, back in 1972, spending on the three largest entitlement programs—Social Security, Medicare, and Medicaid—was just 4.4 percent of GDP. Today, spending on those three programs is just over 10 percent of GDP. That’s a 6 percentage point jump above what it was 40 years ago—an increase that is more than the size of the entire Defense Department today. Worse, spending on the “big three” is headed toward 16 percent of GDP in 2035, according to the Congressional Budget Office (CBO). If that were allowed to happen, there would be virtually no room left in the budget for anything else, assuming the historical rate of federal revenue collection.

And what does the president propose to do about this problem? Exactly nothing.

His plan for deficit reduction can be summed up briefly: tax hikes and defense cuts.

According to CBO, the federal budget deficit under the president’s plan in 2022 would be about 3 percent of GDP, down from about 8.1 percent in 2012. What is the source of that deficit reduction? First, the president’s plan would bump federal revenue up from its historical average of 18 percent of GDP to 19.8 percent in 2022. Further, according to the president’s own numbers, spending on security-related items in the budget would plummet from about 5.6 percent of GDP today to about 3.4 percent of GDP in 2022. So, between tax hikes and defense cuts, that’s 4 percent of GDP in supposed deficit reduction. The rest would come from projected improvement in the economy. There’s no real spending discipline at all beyond the deep defense cuts. In fact, CBO estimates that outlays under the president’s budget will still be nearly 23 percent of GDP in 2022, well above the historical norm of about 20 percent—and that assumes an unprecedented era of international tranquility.

The president was right about one thing today: The House budget plan is built on a very different vision for our country. Voters should be grateful for that.

But, contrary to what the president said yesterday, the House budget plan is not a tax giveaway for the rich. CBO expects current tax policy—including all of the tax provisions enacted in 2001 and 2003 and extended through 2012—to produce about 18 percent of GDP in total federal revenue over the coming decade (these projections are under what the agency calls the “alternative fiscal scenario”). In other words, if Congress were to extend current tax policy for another decade, total federal revenue collection would be where it has been for the better part of a half century.

That’s essentially the level of revenues the Ryan budget plan would collect. It’s not a giveaway to the rich. It’s not even really a tax cut at all. It’s a plan to reform federal income and corporate taxes to broaden the bases, lower the top rates, and promote growth while providing a responsible level of revenue for the federal government.

On taxes, the Ryan budget is very much in line with other bipartisan plans developed over the past couple of years to reduce deficits. For instance, the Bowles-Simpson plan and the plan developed by the Bipartisan Policy Center both included tax-reform proposals to lower the top individual income-tax rate below today’s current 35 percent bracket. The outlier in this regard is President Obama, not Chairman Ryan. The president’s plan is the only major proposal on the table today that would go in the other direction and push the top individual income-tax rate up—to around 40 percent—rather than down.

On spending, the Ryan budget does what the president refuses to do: provide leadership on entitlement reform. On Medicare, the plan would move toward a premium-support model that independent estimates show could reduce Medicare spending by 5 percent right away by making the program more efficient. The president’s alternative is to cap the program with price controls and thus to ration care.

Most of today’s presidential speech was devoted to claiming that the Ryan budget plan makes cuts that simply aren’t there. The president and his aides pretended that the Ryan plan applied across-the-board reductions to all domestic programs. But that’s not what the Ryan budget would do. It caps spending for sure, but it emphasizes over and over that cuts would come from programs that aren’t working, streamlining the bloated federal bureaucracy, and giving states much more power to take the next steps in welfare reform.

The president and his team complain regularly that they are unfairly blamed for doing
nothing to address the massive debt explosion that has occurred during the Obama years. Really? Every time there’s a serious proposal from conservatives to actually solve the problem, the president views it as an opportunity to score cheap political points. That’s the reason for fiscal gridlock, and it’s something voters should hold him accountable for in November.